Juggling Dynamite

Those hoping that the market plunge between February and March was enough to launch the next secular expansion in stock prices overlook a mountain of historical evidence.  For some illuminating charts and commentary on this topic, read the latest from Lance Roberts,   The “roaring 20s”–the fundamental problem of the bullish view. Here is just one important takeaway:

Let’s also not forget the singular most important fact.

Our history’s previous secular bull markets grew from extreme under-valuations, washed-out financial markets, and extremely negative sentiment. 

Such was not the case over the last decade as the Federal Reserve and Government have pumped more than $36 Trillion into the economy to keep it “afloat.” 

As I have explained many times, extreme asset prices are no free lunch and have historically been cured by a collapse in said asset prices or a long period of stagnant prices that works to restore attractive investment metrics once more.  Given that today’s stock market capitalizations (price x shares) as a ratio of economic growth (GDP) (charted below) are the most extreme ever recorded–nearing 4 standard deviations from the mean (far right green circle below), this suggests the correction period yet to come will also be extreme.
A decade of zero to negative real total returns (including dividends and before fees) is also suggested by the present S&P 500 price divided by an average of corporate earnings for the last ten years, adjusted for inflation (CAPE).  The pink circle below plots the present reading above 35 and all other years since 1881 (bottom axis) and the annualized returns over the decade that followed each point (left axis).  The only three worse readings were in 1999, 2000 and 2001–and sure enough, predictably, the decade following each did deliver negative real returns.   Go figure; the price paid does matter!
Nil to negative total returns for present holders for the next decade is a best-case scenario presuming they are able to hold throughout and not need or want to sell or withdraw any income or pay any investment fees.  Any of these actions during the correcting period will make returns more negative.

Low yields are one thing, but try inputting a decade of nil to negative compound growth into financial projections and see what happens to hopes, plans and dreams.  Most financial plans today are set up to fail miserably.  Failing financially is miserable indeed, especially later in life when there is less time to go back to work and make back losses.

To avoid the math of loss and chart a more stable course, one needs to take proactive steps ahead of the herd.  Thinking people can do it.

As governments target 70% minimum vaccination bogies for their populations, recipient willingness is presumed but, according to several recent surveys, not assured.  As shown in the chart below from surveys completed between August and October 31, appetite in Canada, the US, China and Russia remains sub-target even if shots are prescribed by law.

Economist Danielle Goldfarb adds this context:

Perhaps the most important factor determining the shape of the economic recovery will be whether and when enough people take a COVID vaccine to achieve herd immunity. Canada has a strong economic stake not only in its own citizens getting vaccinated but in global vaccination and global economic recovery. With a relatively small domestic market, Canadian livelihoods depend heavily on U.S. and global exports, international students, and tourists.

Vaccines on their own don’t save lives; widespread vaccinations do. The data in this chart show notable skepticism about vaccines in Canada, the U.S., and other countries, even in the face of the pandemic’s major economic and social disruptions. They reflect broad-based sentiment including opinions of those who are not typical survey takers nor express their pro- or anti-vaccination views on social media, and they were collected anonymously to maximize the chances of honesty on such a sensitive topic.

The compounding impacts of CO2 emissions will be an escalating cost for years to come, everything governments do now to support struggling sectors and stimulate spending during the pandemic should move us toward the larger imperative of sustainable resource management. This is especially true since we are piling on debt to pay for this support.  If funds spent now do not help to reduce future costs and waste, then our future will just get harder and harder to fund.

As much of the aviation industry fights to survive the coronavirus pandemic, some economists and engineers see the crisis as an opportunity to use stimulus funds to propel air travel to a carbon-neutral future.  Here is a direct video link.

Governments missed a huge opportunity to rein in and reorder the bubble-inducing, law-abusing finance sector in 2009 when taxpayer funds were handed out to them virtually condition-free.  Similarly, auto bailouts in 2008 should have been tied to EV production timelines.  We have paid an ongoing price for mal-investment in both sectors since.  We can’t afford to keep making the same mistakes.